GM Share Sale Shows U.S. Auto Revival as Economic Pillar

By Ian Katz and Tim Higgins -
Jun 6, 2013

The Obama administration’s decision
to sell more of its stake in General Motors Co. (GM) underscores the
resurgence of a domestic auto industry that emerged from near-collapse to become a pillar of economic growth.

The U.S. Treasury Department said today that it agreed to
sell 30 million GM shares for $34.41 apiece, leaving it with
less than a 14 percent stake four years after rescuing the
company along with Chrysler Group LLC. The sale coincides with
Detroit-based GM’s return to the Standard & Poor’s 500 Index (SPX) for
the first time since its 2009 bankruptcy.

“The auto industry is alive and well,” said George Magliano, senior economist at IHS Automotive in New York. “And
today one of the leading industries in the recovery, though it’s
a rather lackluster recovery, is the auto industry.”

Automakers in the U.S. contributed 14 percent of the 2.1
percent average rate of growth for gross domestic product in the
recovery that began in the third quarter of 2009, according to
data from the Commerce Department. U.S. auto sales are on pace
for the best year since 2007 as GM, Ford Motor Co. (F) and Auburn
Hills, Michigan-based Chrysler all gained market share in the
January-May period, the first time that has happened in at least
18 years.

The federal government spent $80 billion to bail out the
industry, including more than $63 billion on GM and Chrysler.
The effort will cost taxpayers $20.3 billion, according to a
March 31 Treasury estimate.

CEO’s Defense

GM has been profitable every quarter since its 2010 initial
public offering and posted $6.19 billion in net income last
year.

Chief Executive Officer Dan Akerson defended the U.S.
bailout during GM’s annual shareholder meeting today in Detroit
after a speaker suggested it was hindering sales.

“Four years afterward, it’s pretty hard to argue that it
wasn’t successful,” Akerson said. “Twenty-five billion dollars
in profits later, growing employment and a strong manufacturing
basis and the first time in more than a generation that all
three manufacturers were profitable, speaks to whether it was a
wise decision.”

‘More Expensive’

Some still question the cost of the bailouts. That cost
tarnishes the bailouts, which were “more expensive than they
needed to be” and structured to favor labor unions, said
Phillip Swagel, who was an assistant Treasury secretary under
President George W. Bush and is now a professor at the
University of Maryland in College Park.

The industry’s revival has drained much of the controversy
from the Obama administration’s decision, which was opposed by
some congressional Republicans at the time and later became a
flash point in last year’s debates between President Barack Obama and Republican challenger Mitt Romney.

“The industry was extremely vulnerable, and had GM gone
down, it likely would have precipitated a depression in the
overall economy,” David Cole, chairman emeritus of the Center
for Automotive Research in Ann Arbor, Michigan, said in an
interview. “It was like an investment that avoided a
catastrophe.”

The concern was that an uncontrolled GM liquidation would
have a domino effect throughout the U.S. auto industry, causing
suppliers, already struggling to stay in business, to collapse
as well.

Edge of Cliff

“If GM had gone down, that would’ve taken the whole
industry down because it would’ve shut down critical suppliers
who were at the edge of the cliff,” Cole said.

A healthy GM is helping other parts of the industry,
including suppliers and dealers, David Whiston, an equity
analyst with Morningstar Inc. (MORN) in Chicago, said in a telephone
interview. “A stronger GM is great for GM stakeholders,” he
said. “It is certainly good for the auto industry.”

The rescue saved 1.14 million jobs in 2009 at automakers
and companies that depend on the industry, according to the
center. A collapse would have cut $96.5 billion in personal
income in 2009 and 2010, and it also would have cost the federal
government $28.6 billion in extra jobless benefits and reduced
Social Security contributions and income taxes in those years,
the center said.

“There are parts of the country where the unemployment
rate would have been a couple of points higher and taken much
longer to come down than was actually the case,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy
Priorities who previously was Vice President Joe Biden’s chief
economic adviser.

‘Much Tougher’

“It would have been a much tougher job market,” said
Bernstein, who was a member of a presidential task force on the
auto industry.

The U.S. unemployment rate fell to 7.5 percent in April
from a peak of 10 percent in October 2009. In Michigan, home to
GM, Ford and Chrysler, the rate has fallen to 8.4 percent from
14.2 percent in August 2009.

The Troubled Asset Relief Program, initially aimed at
financial firms, was broadened to housing and autos as the 2008
crisis unfolded, though less than two-thirds of the $700 billion
authorized by Congress was used. The Treasury has recovered
$398.2 billion of the $420 billion disbursed through TARP, the
department said yesterday in a statement.

Treasury’s Stake

The U.S. owned 219.2 million shares in GM, or 15.9 percent,
as of yesterday, GM said in a filing today. After Treasury
completes selling 30 million shares, its stake will decrease to
13.8 percent, according to the filing. The UAW retiree health
care trust’s stake will decrease to 13.1 percent from 14.5
percent after it sells 20 million shares.

In 2008, Bush gave GM and Chrysler federal money, and the
companies received additional help through managed bankruptcies
under Obama’s administration.

GM rose 1.2 percent to $34.44 at the close in New York
while the S&P 500 increased 0.8 percent. The shares have gained
19 percent this year, eclipsing its $33 initial public offering
price, compared with a 14 percent increase for the S&P 500.

Investor confidence in GM has increased since the automaker
said in December it would spend $5.5 billion to buy 200 million
shares back from the Treasury, and the government said it would
sell the rest of its holding within 15 months.

Shares reached a 10-month-high the day of the announcement
in December and have continued to climb after topping their IPO
price on May 17 for the first time in two years.

Dividend Possibility

The sale is part of the Treasury’s strategy to end its GM
ownership stake. By spreading out its share sales over many
months, the Treasury can minimize pressure on the stock price.

Chief Financial Officer Dan Ammann has said the Treasury’s
sale of shares is good for GM because it removes the perception
of government involvement in the company.

Akerson today left open the possibility that the automaker
may repurchase additional shares from the U.S.

“It depends upon what happens,” Akerson told reporters
following the automaker’s annual meeting. Once Treasury’s stake
falls below 10 percent, it’s no longer restricted by how many
shares it can sell in a quarter, he said.

“There are many variables in the equation and depending on
where we are at that particular point in time -- end of this
year, early next year -- we might be a factor in that,” Akerson
said. “We’ll have to wait and see.”

While GM isn’t prohibited from issuing dividends, it’s
choosing to spend money on new products and facilities, Akerson
said.

“First and foremost we must continue to invest in this
company so we don’t lose the competitive edge we have today,”
the CEO said.